Interposed Entity Election: Understanding Australia’s Tax Structure for Family Trusts

Estimated reading time: 10 minutes

Key Takeaways

• Interposed entity elections (IEEs) allow Australian companies, trusts, or partnerships to be included in a family group for tax purposes under the family trust election framework.
• IEEs help prevent the heavy 47% Family Trust Distribution Tax (FTDT) when distributing income among related entities.
• Strict conditions apply, including the “family control test,” and accurate, permanent documentation is crucial.
• IEEs can only be revoked in very limited circumstances—careful planning is essential.
• The process involves ATO forms, ongoing compliance, and critical attention to regulatory detail.

The interposed entity election is a pivotal yet often misunderstood aspect of Australian tax law. This important provision allows specific entities to join a family group for tax purposes, potentially saving businesses and families from substantial tax penalties. Let’s dive into what IEEs are, how they work, and why they matter for those navigating the complex world of family trust election and family trusts in Australia.

What Is an Interposed Entity Election?

Interposed entity elections (“IEEs”) are provisions allowing companies, partnerships, or trusts to become part of a “family group” under a valid family trust election, even when they have no fixed entitlement to the original family trust’s income or capital.

This election is crucial because it allows distributions to fall inside the family group and avoid the 47% Family Trust Distribution Tax (FTDT). Proper elections can make a major difference in tax outcomes for Australian families and businesses.

The Critical Purpose of Interposed Entity Elections

The key purpose of an IEE is to let certain business entities participate in tax-effective distributions from a family trust, by being treated as “in the family group”. This helps family groups manage succession, asset protection, and legitimate business expansion without hefty FTDT liabilities.

Tax experts describe it succinctly: “An IEE creates a pathway for distributions between related entities that might otherwise trigger punitive tax consequences.”

Essential Conditions for Making a Valid Election

• Family Control Test: The entity must be controlled by the specified family group (as per ATO requirements) for the entire applicable period. For companies, family members must often have >50% voting power or distribution rights.
• Distribution Requirements: All distributions or entitlements must stay inside the family group, reinforcing the intent of cohesive, family-based wealth management.
• Retroactive Effect: Backdating is permitted if all above criteria have been met since the chosen start year.

The Process: How to Make an Interposed Entity Election

1. Document the election in writing – using the official ATO “Interposed entity election or revocation” form (NAT 2788).
2. Choose the effective date – it is the later of your specified date or when control begins and remains continuous.
3. Signature requirements – all relevant parties (trustees, directors, public officers, or partners) must sign and date.
4. Multiple elections allowed – one entity can have IEEs for different trusts, if the specified individual is consistent across those family trust elections.

Limited Options for Revocation

• If the entity becomes 100% family-owned with fixed entitlements, or if all linked FTEs are revoked, you can revoke the IEE.
• IEEs are permanent except for rare, prescribed scenarios – automatic if the underlying FTE is revoked.
• Revocation process: file as directed in the entity’s tax return, or within two months after the income year if the entity is dormant and has no return obligation.

As cautioned by experts: “The permanence of these elections means careful consideration is essential before lodgment. Most businesses cannot afford to make an error with these elections.”

Critical Concepts for Understanding IEEs

• Family Trust Election (FTE): Designates a trust as a “family trust” and defines the family group for distributions.
• Family Control Test: Ensures the entity is genuinely controlled by family members, with requirements varying by entity type.
• Narrowing of Family Group: Electing into different specified individuals can reduce the “effective family group” to the overlap of both lists, affecting who may legally receive trust distributions.

Why IEEs Exist: The Policy Foundation

IEEs were introduced to allow legitimate family businesses to pass income and capital among closely linked entities without prohibitive taxes, while blocking tax avoidance through “outsider” distributions. They keep losses and franking credits within the family group and reflect a policy balance between flexibility and integrity.

Compliance Importance: Avoiding Costly Mistakes

IEEs are complex and misapplication can lead to severe FTDT liabilities at 47%. The ATO closely scrutinises these moves, particularly around family trust election and interposed entity elections.

It’s essential for trustees and advisors to ensure perfect compliance.”

Forms and Guidance: Navigating Official Resources

Access official resources for the current tax year.

• Watch for common errors: missing or inconsistent dates, signatures, or named individuals; or failing ongoing family control tests.

Australian-Specific Provisions

IEEs are unique to Australian tax law (Schedule 2F, Income Tax Assessment Act 1936). Local, specialist advice is vital.

Common Usage Scenarios

• Layered family group structures – Where a trust distributes to a family-controlled company or trust
• Succession planning – Smooth generational transfer of business interests within a family group
• Asset protection – Separating assets among interposed entities for risk management
• Distribution planning – Ensuring all recipients of trust distributions stay compliant with ATO’s “family group” requirements

Core Aspects at a Glance

• Who can elect: Companies, trusts, or partnerships outside the initial family group
• Precondition: A valid family trust election naming a specified individual
• Main benefit: Avoids 47% FTDT on trust distributions to included entities
• Permanence: IEEs are typically irrevocable—exceptions are rare, planning is critical
• Rising ATO scrutiny: Mistakes or omissions can result in significant cost

Frequently Asked Questions

• What does an Interposed Entity Election do?
• How do you make an IEE?
• Can an IEE be revoked?
• What is the family control test?
• What if family group members change?

Important Disclaimer:
The information provided in this content is for general informational purposes only and does not constitute legal, financial, or professional advice. Regulations and circumstances may vary based on your individual situation. You should always seek advice from a qualified professional, such as a